Business Valuation – What is it?
Business Valuation is a process used to determine the economic worth of an entire company or part of a company. There are multiple methods to carry out business valuation; however, each method includes the objective and fair assessment of a company’s economic value.
Specifically, business valuation methods assess the worth of your assets, including equipment, infrastructure, inventory, property, liquid assets, accounts receivable, and any other asset of economic value. The value also will be dependent on projected earnings, management structure, minority and marketibilty discounts, revenue growth and many other factors.
Business Valuation – Why Do You Need it?
While some business owners consider it to be frivolous, knowing your company’s monetary value is an essential part of your business strategy. Small business owners often resort to guestimating or speculating their company worth to save a few bucks. However, attaching an accurate and true monetary value to your company is essential for multiple reasons, which are:
A valuation is necessary when a company acquires another company to understand its market value. Knowing the value of the company, tell the buyer whether it is feasible to acquire the company. Furthermore, it advises their decisions regarding the reorganization of the capital structure, liquidation, filing for bankruptcy, etc. It also helps management and owners understand what part of the business drives value, which will allow them to make better descions for an eventual sale.
Likewise, a company must get a business valuation if it wishes to attract suitable buying offers. Getting a valuation of your company, i.e., a monetary value of what your company is worth in cash helps attract more buyers and get a competitive sale price.
Business valuation is critical if you are planning to sell or expand your business as an exit strategy. Through valuation, you can find the accurate value of your company and then plan to improve profitability to reach the desired level.
In case of disaster strikes, a pre-prepared business valuation can help you get the money your business is worth. Insurance companies are famous for undervaluing assets and trying to get out of paying money as much as they can. An existing objective assessment of your company saves you the trouble of facing such underhanded practices.
Moreover, owners of closely-held businesses have their businesses evaluated to take a key person insurance policy. The key person insurance is a guarantee that the insurance company will pay them a specific amount, based on the value of a business, in case something happened to the business owner. Therefore, an astute assessment of the business’ value will help a business owner get fair insurance.
If a business interruption policy is in place, it will be crucial to have a valuation to show pre and post interruption valuation.
A business valuation comes in handy when two or more businesses want to enter a partnership. A fair and accurate valuation preempts any disputes in the future and forms a basis for a mutually acceptable agreement.
A fair valuation of your business is of critical importance in case you have to carry out an equitable division of assets. A fair valuation aids the settlement process if the divorced couple settles the division of assets themselves or a judge orders it after trial. In both cases, an accurate estimate of one’s business leads to equitable division.
Disputes between shareholders are common; they may occur when shareholders disagree on ownership percentage, mergers, and acquisitions, among other issues. When these disputes arise, a fair business valuation is often required for a justifiable settlement.
Valuation comes in handy during legal proceedings as well. Whether its disputes of ownership or damages to business value, valuation plays an important role in the trial and settlement of legal matters.
Employee Stock Ownership Plans (ESOPs)
A closely-held business may also need a business valuation to determine a fair value annual share price of Employee Stock Ownership Plans or ESOPs. ERISA and the IRS require organizations to accurately assess the fair value of their ESOPs to determine share price.
Business valuation also evaluates the worth of a company’s intellectual property, including patents. . In case a competitor tries to steal the intellectual property, the company can sue for infringement on the basis of lost revenues and diminished value of the intellectual property.
At times, a company will need a capital infusion in the form of selling equity to an investor. A business valuation will allow you to approach investors with confidence knowing the valuation you are offering is fair and accurate.
The tax amount on valuable gifts, such as property, money, or other assets, differs from the normal tax rate Gift of closely held business shares need to be properly valued and disclosed to the IRS. Should the value be challenged and deemed higher than disclosed, it could result in significant tax plus penalties and interest.
Estate Planning & Estate Tax
Estate planning and estate tax deal with tax on property, business, or other assets that are inherited by the descendants of a deceased person. An objective business valuation is necessary to save your descendants from the burden of paying heavy taxes on a business that was not valued accurately.
Forensic Accounting is the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation.
As forensic accountants we often have to give expert evidence at the eventual trial. Forensic accountants not only utilize their accounting and auditing skills, but also use their investigative skills to determine what events took place in a financial setting.
- Engagements relating to civil disputes may fall into several categories:
- Calculating losses and economic damages
- Forensic examination of financial statements
- Fiduciary and beneficiary disputes
- Shareholder disputes
- Valuation disputes including ESOP
- Fraud detection and prevention
- Litigation Support
Our engagements frequently require l testimony in deposition and trial. We are skilled and experienced in all areas and facets of forensic accounting and business valuation. With our experts as part of your litigation support team, you will have experience, integrity, and cost effectiveness on your side.